Back in 2020, shares in miner Ferrexpo (LSE: FXPO) cost slightly less than they do now. In little more than a year, they then more than quadrupled. Now that Ferrexpo shares have slumped again, I think they look cheap.
But is looking cheap the same thing as actually being cheap?
Dramatic price swings
Ferrexpo shares have certainly moved around a lot in the past five years, as this chart shows.
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Partly that reflects the cyclicality of metal prices. That is a consideration for me whenever I think about investing in the shares of any miner.
But in the case of Ferrexpo, the price fall is largely explained by specific political risks. Its mining operations are in Ukraine. They continue to produce even in wartime, although output has fallen sharply and the miner has faced logistical difficulties in shipping its output to customers.
On top of that, the Ukrainian state has been involved in a legal dispute with Ferrexpo’s main shareholder. Last month, Ukraine’s Supreme Court ruled in Ferrexpo’s favour.
That should be a positive development. But in the politically volatile environment of Ukraine there is a risk of further lawsuits about asset ownership, as well as ongoing restrictions on moving money abroad. That means the once attractive dividend is unlikely to return any time soon. It was also announced this month that the chief executive will leave the company.
Long-term promise
Clearly then, there are substantial risks here. That helps to explain the big price fall we have seen in Ferrexpo shares.
But is the underlying business one that still has potential? After all, the market capitalisation now stands at £660m. That is less than Ferrexpo earned after tax in 2021 alone.
Whatever market swings may come in pricing for iron ore, demand is likely to remain strong in the long term. That should be good news for Ferrexpo. It has proven in the past it can be highly profitable and that could be the case again in future. On that basis, the valuation looks very cheap.
My concern is that the low valuation looks almost too good to be true. For Ferrexpo to get back to 2021 earnings – and be able to pay them out to shareholders as dividends – a lot needs to go right. But the political risks involved are substantially (or totally) outside of its control. I think the potential rewards here are high. But so too are the actual risks.
One of the reasons I did not invest in Ferrexpo historically was its concentration of assets in one country. Given the ongoing war in Ukraine, that risk looks more pertinent than ever.
Cheap or not?
On that basis, I have no plans to invest. I reckon Ferrexpo shares look cheap, given the company’s possible future performance, as shown in past years. But whether they actually turn out to be cheap, or a value trap, depends on political risks outside Ferrexpo’s control.
Those risks sit uneasily with me as an investor. So while Ferrexpo’s valuation looks like it may be cheap, buying the shares does not tempt me.
